A bridging loan is a short term asset-based finance that provides you instant cash flow. You can use these loans to fulfil your immediate financial needs and repay the amount when permanent or long-term financing becomes available. Bridging loans help you by bridging the gap when you want to buy something but waiting for funds to become available by selling another thing. Like a mortgage, a bridge loan is a secured loan, and you must have a high-value asset to get it, such as land or property.
When considering a bridging loan, one important thing to consider is its viability. The interest rate is the primary indicator that shows whether a loan is feasible or not. Here is a complete guide about the interest rates and costs of bridging loans.
Interest Rates Of Bridging Loan
The interest rates on bridging loans are usually high. Typically the monthly interest rates are between 0.5 to 1.5%, which turns out into an Annual Percentage Rate (APR) of 6.1% to 19.6% that is higher than any mortgage loan. Due to the short term nature, the interest rate on bridging loans is charged monthly rather than annually. The interest rate can be fixed or variable. In fixed-rate loans, the interest rate remains the same throughout the loan term, while in the variable interest rate, the lender changes the interest rate according to the Bank of England rate, which means the end payment can go up or down.
However, you can choose how you can repay your interest rate.
There are three main ways in which you can repay it, which include:
You can pay interest monthly, and the amount will not add to your bridging finance at the end.
You can borrow the interest rate for a specific period and then repay at the due date.
Deferred Or Roll up:
In this type, you pay the interest rate at the end of the loan term.
Some lenders allow you to pay off interest rates using a mixture of the ways mentioned above. For example, you can choose retained interest for the first 3 or 4 months and then start paying monthly.
Different Bridging Loan Costs To Consider
When taking out a bridging loan, there are many costs other than the interest rate you need to consider. It is because all these costs, in the end, add up to your bridging loan amount. The best way is to compare quotes from different lenders and understand what a bridging loan will cost. To calculate the actual cost of a bridge loan, you should add up the interest rate to all the other charges involved in it. Following fees can be included in your bridging loan:
Generally, the interest rate on bridging loans is charged monthly, but some lenders provide you with the option to have interest deferred, retained or rolled up. In this case, you do not pay monthly interest, and it is paid at the end of the loan term.
The lender charges it for setting up a bridging loan facility for you. Not all lenders charge arrangement fees, ranging from 0 to 2% of the borrowing amount.
Most lenders include an administration fee into their agreement that is added to the cost of a bridging loan.
Your bridging loan lender charges a legal fee for setting up a facility for you. It can vary from lender to lender.
A valuation is required before setting up most bridging loans. The lender visits your property to find out its value to ensure that it is worth the amount you want to borrow. This fee is not added to the loan amount, and it is an upfront fee that you have to pay to the lender or the surveyor when he comes to your property for valuation.
Some lenders charge an exit fee that is similar to the arrangement fee, but it is charged when a loan is redeemed.
You can take a loan from a direct lender or through a broker. When you choose a broker, you have to pay a fee to the broker for finding a lender and arranging bridging finance for you.
Factors Influencing Bridging Loan Interest Rate
There are many bridging loan providers in the UK. A common factor between all the lenders is that they charge monthly interest rates. The interest rate varies from as low as 0.29% to as high as 2% per month. This interest rate depends on several factors, including:
Type Of Property
The property borrowers use as security can be residential, semi-commercial or commercial. The residential property is considered less risky by the lenders and thus have low monthly interest rates. Semi residential properties such as shops along with living accommodation are also considered low-risk security. In contrast, commercial properties and this level of risk reflect the monthly interest rate of bridging loans.
Condition Of Property
Generally, the property that is not suitable for a mortgage is also accepted by the bridging loan lenders. But the amount of work that a property requires and the property’s condition affects the loan rate.
Loan To Value
The more equity provided by the lender, the lower the risk to the lender and thus, the monthly interest rate will also be less. The lender assesses the risk based on the value of property and equity in the property. The lower the risk, the lower will be the loan to value.
The amount of time for which you are lending money determines the bridging loan rate. Usually, the loan is offered for up to a year, but some lenders offer loans beyond this term.
Type Of Legal Charge
If your bridging loan is a first charge loan, the interest rate will be low compared to the second charge loan.
Other than that, your credit history, location of property and affordability also affect the loan rates. If you want to get the best loan rates, you must take quotes from different bridging loans companies, make price comparisons, and select one that offers the best rates.